Can minimum wages cause a big push? Evidence from Indonesia

Abstract

PRELIMINARY AND INCOMPLETE: PLEASE DO NOT CITEBig Push models suggest that local product demand can create multiple labor market equilibria: one featuring high wages, formalization, and high demand and one with low wages, informality, and low demand. I demonstrate that minimum wages may coordinate development at the high wage equilibrium. Using data from 1990s Indonesia, where minimum wages increased in a varied way, I develop a difference in spatial differences estimator which weakens the common trend assumption of difference in differences. Estimation reveals strong trends in support of a big push: formal employment increases and informal employment decreases in response to the minimum wage. Local product demand also increases, and this formalization occurs only in the non-tradable, industrializable industries suggested by the model (while employment in tradable and non-industrializable industry also conform to model predictions).

Poverty and the Labour Market in Indonesia: Employment Trends Across the Wealth Distribution

“…Compared with 2003, the share of working poor who are salaried workers remained constant (or even decreased when benchmarked against 2000), whereas overall the share of salaried workers increased, particularly among the richer deciles (decile 7 and decile 10) underscoring that salaried employment is less likely to be associated with poverty in 2012 compared with 2003 10 . This finding-that salaried employment is increasingly helping workers to avoid and escape poverty-is consistent with results from academic research, which points to substantial increases in minimum wages in the 1990s and 2000s, which brought many salaried workers and their families out of poverty (Magruder 2013;ILO 2013). Casual workers Unpaid workers Self-employed Salaried workers …”

Credible Research Designs for Minimum Wage Studies

“…36 The synthetic control approach picks non-negative weights for donor units such that a weighted average of donors is "close" to the treated unit in the pre-intervention values of the outcome variables and/or other covariates.…”

“…Indeed, minimum wage policies are spatially clustered, with important economic and political differences existing between states with relatively high versus low minimum wages over the past two decades. Recent minimum wage research has used regional controls and policy discontinuities to control for such heterogeneity-e.g., Dube, Lester and Reich (2010), Allegretto Dube and Reich (2011), and Magruder (2013). Such designs are well-established in the discipline and constitute well-integrated parts of the "credibility revolution" that has swept through much of labor and applied microeconomics.…”

The impact of minimum wages on informal and formal labor market outcomes: evidence from Indonesia

“…Similar employment effects are found by The World Bank (2010), where the authors use Sakernas as well and report a shift from the formal to the informal sector, although minimum wages do not appear to change the overall employment level. Magruder (2013) opposes these results by observing that an increase in minimum wages in one district relative to its adjacent districts leads to more employment in the formal sector and to a decrease in informality. Finally, Chun & Khor (2010) use the IFLS and apply an estimation strategy developed by Neumark et al (2004) which includes dummies in order to indicate an individual's wage distribution position.…”